Henry Paulson - On the Brink - Inside the Race to Stop the Collapse of the Global Financial System

The day after my dinner with the Friedmans, Ben Bernanke, who had flown back overnight from a G-20 meeting in São Paulo, met me in my office for a TARP oversight board meeting to approve the AIG investment and to make some joint calls to congressional leaders to prepare them for the AIG announcement. None of the leaders we contacted that Sunday afternoon and evening objected, other than Richard Shelby. As John Boehner said, “You’ve got no choice.”

On Monday, as AIG revealed its breathtaking third-quarter loss, Treasury announced TARP’s first one-off investment when it unveiled the revised package for the company. Though the Dow slipped nearly 1 percent, AIG’s shares rose 8.1 percent, to $2.28.

The rescue package took care to apply TARP’s strictest provisions on golden parachutes and froze the size of the bonus pool for the company’s top 70 executives. But that did not satisfy an increasingly angry public.

The same day we announced the AIG deal, Dan Tarullo, the head of Obama’s economic transition team, arrived at Treasury with Lee Sachs, a former Clinton Treasury official who was under consideration to run TARP for the new administration. Tarullo said his team wanted to monitor what we were doing with TARP but didn’t expect to be included in policy decisions. After all, there could be only one president at a time. I told them that I would be making a major speech on November 12 and that they would like it, because we wouldn’t be announcing new programs and we wouldn’t ask for the remaining TARP money. They both were visibly relieved. I had accepted that it wouldn’t be realistic to get Sachs nominated and quickly approved for the permanent post, but I’d hoped he would take up residence at Treasury and work side by side with Neel. As it turned out, we didn’t see much of him or Tarullo.

Between collapsing insurance giants, dying shopping malls, bailed-out banks, and all-but-bankrupt automakers, the American people had watched one institution after another totter. I’d kept my public comments to a minimum in the weeks before the election. But I knew the markets and the press were growing impatient, and I began working hard on the speech I planned to deliver on November 12 at Treasury, in which I would make clear my decision to move away from buying illiquid assets.

I had struggled with this decision, and up until a few days before the speech I would stop by Neel Kashkari’s office every morning to talk over possible asset-purchase programs. He had lined up several big money managers, including Western Asset and Black-Rock, to work on the government’s behalf, but we concluded that we couldn’t design a program big enough or execute it quickly enough to make a dent in the problem in any reasonable period of time.

On November 11, the Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac, announced that the GSEs would adopt parts of Sheila Bair’s IndyMac Protocol to simplify mortgage modifications. The FHFA program targeted people who had missed at least three mortgage payments and used the property as their primary residence; like the IndyMac Protocol, it limited mortgage payments to 38 percent or less of the household’s gross monthly income. The program had built-in flexibility, and reductions in monthly payments could come from cutting the interest rate, extending the life of the loan, or deferring principal payments. Fannie and Freddie owned or guaranteed 31 million mortgages, so this would extend foreclosure relief to many more homeowners—and, I hoped, assuage those who complained that the government had not done enough.

But Sheila Bair did not show much enthusiasm for the FHFA program and continued to push Treasury to back her loss-sharing plan. I called Sheila to let her know I had decided against trying to get the last tranche of TARP, and as a result would not be announcing any new foreclosure efforts, such as her insurance program, beyond FHFA’s new initiative. This news did not please her, but she said she understood.

My round of calls to congressional leaders included a conversation with Barney Frank. I mentioned the FHFA program and explained to Barney that we couldn’t do more on foreclosures without a final tranche of TARP money, and we weren’t going to ask for that. I also pointed out that we hadn’t told Congress or the public that the TARP funds would be used for a spending program. Although he didn’t like my message, he didn’t push back as hard as I’d expected. But I heard from him again early the next morning.

“You need a housing program,” he said. “We sold TARP to our caucus because owning mortgages would help you deal with the foreclosures, and this is going to cause a big problem with them.” He added that if we came up with a foreclosure plan, we could get the last tranche of TARP.

He was optimistic that President-elect Obama would support the effort and that we would get Democratic votes. If we didn’t like Sheila’s insurance program, we should come up with something different, he said. I liked Barney’s attitude, but I told him he was more optimistic than anyone else on this issue, and that I’d had no indication that the new administration wanted to work with us.

Getting my speech right was tricky. I hadn’t provided any public update on our progress since late October, and I was concerned about unsettling the markets and discrediting our efforts. Everyone expected me to announce my intent to request the rest of the TARP funding. Saying definitively that we weren’t going to would not be well received, so I decided it was better not to mention it at all. I knew, though, that the market participants would do the math and wonder if I had enough money left to deal with emergencies. I would have to communicate that I was comfortable with the funds I had and with the procedures for getting the rest, and hope for the best.

Similarly the markets were expecting me to unveil the details of a program to buy assets. And buyers and sellers of illiquid assets had been frozen waiting for our program, so silence was not an option. I needed to explain our rationale for not purchasing the toxic securities and to describe the other priorities for TARP dollars. I focused on Treasury’s ongoing efforts with our bank capital program and our plans to help the consumer loan market.

Michele Davis and I were going over last-minute preparations for my speech when Jeb Mason burst into my office to make a final plea for a small-scale asset program in which Treasury would buy whole mortgages and get foreclosure relief for the homeowners.

“Hank, I want to say one more time, you shouldn’t be going out there and saying you’re not going to buy illiquid assets directly,” Jeb said. “We should have some program, even if it’s a small program.”

I always encouraged give-and-take, but that morning, knowing that I was about to make a controversial announcement to a roomful of reporters, I was not in the mood for it. The program he wanted would have been a nightmare to administer. “I’ve heard you multiple times on this, and I’ve made my decision,” I snapped.

Jeb was right that the speech was risky, but I’d rather get politically lambasted than knowingly develop a program only for show. If I said anything but the truth, I couldn’t look at myself in the mirror.

Shortly afterward, I walked into the bright lights and chattering voices of Treasury’s Media Room, and delivered what I considered to be a terrific, if complicated, speech. In my six-page statement I covered everything the government had done to ease the crisis, from our ongoing HOPE Now mortgage modification program, which each month was helping 200,000 homeowners avoid foreclosure, to the GSE rescue.

I also brought the public up to date on our TARP efforts. I said that after much consideration we had decided that the asset-buying program was not an effective way to use TARP money, though we would continue to study possible targeted purchases. We were working to quickly get capital to participating banks, I added, and emphasized that those institutions had responsibilities when it came to lending, compensation and dividend policies, and foreclosure relief. I noted that Treasury and the Fed were working on a program to improve the availability of consumer credit by improving liquidity in the asset-backed securitization market, and that the facility might be extended to new commercial and residential mortgage lending.